The Tiff over Tariffs

Posted 07.03.2018

To tariff or not to tariff. How much and applied to whom is the question. Simply put, via Investopedia,” tariffs are used to restrict imports by increasing the price of goods and services purchased from overseas and making them less attractive to consumers.”

While its intent is to protect domestic businesses by placing globally sourced imports at a disadvantage through higher prices, it may wreak havoc with your supply chain.

First, a bit of history.

Until the passage of the 16th amendment in the United States, which gave the power of the government to collect taxes, tariffs, were predominantly the sole source of revenue for the U.S. Government. Not surprisingly, the Tariff Act of 1789 was the first official act passed by the newly formed US Congress to thwart dependence on cheaper goods from overseas as well as promoting industry in the new nation.

The accompanying infopic gives a concise summary of U.S. tariffs, with expanded history and details explained here.

To be sure, the United States does not claim to be the architect of tariff imposition. Several sources indicate the word tariff originated in the small Spanish coastal town, Tarifa, where the port “levied fees” for use of its docks. Tariffs, which may also be synonymous with customs duties, were imposed by Ancient Egyptians at various cross points, as well as by the Ancient Greeks who charged fees for goods traveling in or out of state.

Tariffs and the Supply Chain

By nature, supply chains are global. Combined with international trade protection methods, supply chain sourcing decisions are deeply affected by tariffs… and may often create political chaos (trade wars) as well as financial mayhem. In fact, tariffs often represent the greatest obstacle to foreign trade. Along with government regulations, quotas and customs, tariffs pose among the highest forms of external environmental risk to supply chains. As the landed cost, the cost of an item plus its associated tariffs, taxes, transportation costs etc., of goods increase, the greater the impact is to the bottom line. The low cost of goods yielded from years of nurturing supplier relationships and diligent contract negotiations with trusted suppliers are immensely diminished with the onset of unexpected tariff imposition.

Multiple goods, crossing multiple borders, each with their own tariff, significantly add to the final cost of the finished product by the time it reaches the customer downstream.

In recent news, the impact of reciprocal tariff burden is being felt by Wisconsin based motorcycle manufacturer, Harley-Davidson. This iconic American brand – as of this writing- is likely to move the Kansas City production of its European bound goods to Europe. In response to the tariffs charged by the U.S. on imported steel and aluminum, the EU will be charging a retaliatory tariff of 31%, thereby increasing the cost of a motorcycle by ~$2,200 if manufactured in the U. S. and exported to the EU.

With the trade tiff likely to continue, supply chains can take proactive steps. According to Supply Chain Drive, a good strategy would be using technology to conduct costing scenario simulations to prepare for the worst. Opening communication channels is recommended as well.

If, like most businesses you anticipate further disruptions due to trade battles and tariffs, more tips on preparing can be found here.